2.4.3 VAT: a general tax on expenditure for private consumption

At first glance, the fact that businesses, as a main rule, can deduct input VAT could suggest that this deduction system was introduced to ensure that only expenditure for private consumption is taxed. However, in my view, deduction of input tax is also a means of ensuring the neutrality of VAT.

One of the fundamental principles of VAT is the principle of neutrality.1^,2 Two levels of neutrality can be discerned: internal neutrality and external neutrality.3 Internal neutrality, which is related to national aspects, can be divided into legal neutrality, competition neutrality and economic neutrality.4 Legal neutrality means two things: it means that similar transactions should be treated the same (e.g. the same VAT rate or exemption should apply to the same transactions). Legal neutrality also means that the amount of VAT due on the same supply should be the same, irrespective of the length of/amount of transactions in the production and distribution chain before the supply to the final consumer. The right to deduct input VAT ensures the latter.5^,6 Therefore, the system of deduction of input VAT is in my view a means of ensuring neutrality. Be that as it may, the system of deduction of input VAT is such a paramount feature of the EU VAT system that one can hardly call the fact that this ensures that only private consumption is taxed, a ‘side effect’. It is inherent to the EU VAT system. Also, Article 176 of the EU VAT Directive states that “(t)he Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment”. Even though the Council never actually determined this expenditure, the examples that are given (luxuries, amusement or entertainment) make clear that the aim is to tax private consumption.

Other support for my view that taxation of private consumption is the purpose of the EU VAT system, can be found in CJEU case law. With regard to the provisions providing for the taxation of the application or use of business assets for non-business purposes,7 the CJEU has made clear that only private consumption by individuals, not by legal entities, is within the scope of VAT.8 It has also repeatedly stated that a taxable person must bear the burden of VAT only when it relates to goods or services, which he uses for private consumption and not for his taxable business activities.9

From the above it is, in my view, clear that the character of VAT is the taxation of expenditure for private consumption, or consumer expenditure.10